It’s an opportune time for investors and private equity to invest in multifamily real estate. Not only coult it help solve the housing shortage, but the asset class remains a relatively stable investment with the potential for above-average returns.
The record-setting double-digit pace of home price appreciation and rent growth during the COVID-19 pandemic suggests that housing demand has outpaced supply by a significant margin. Home prices are showing a YoY increase of 19.08%, higher than the peak of the 2000s housing boom, per the S&P national home price index reported in late December. Typical rent nationwide rose 15.2% in 2021, according to Zillow data. This double-digit increase has no comparable period in historical data.
The housing shortage can be difficult to quantify, but analysis from Freddie Mac concludes that the supply-demand imbalance in housing entering the pandemic was 3.8 million units. That number has since climbed to 4.4 million. This is a conservative estimate, given that it includes 1 million in unexpressed household formations, or groups of people who would live together if housing was available. This number is likely to be higher given that COVID-19 continues to suppress household formation.
New construction of single-family homes cannot be depended upon to solve this issue, as labor shortages, material costs, and zoning restrictions present significant challenges. In a recent survey, more than half of single-family residential builders reported a shortage of labor. Sharp price increases of 30%+ and supply chain bottlenecks in steel mill products, asphalt, wood window and door frames, copper pipe, and other materials make new construction costly and lengthen the time to build. Though new construction closed some of the gap between supply and demand last year and will likely make more progress this year, many experts are saying “it will only be a drop in the bucket.”
What is the solution?
The path to closing the gap in housing supply is likely to be a combination of new multifamily construction, value-add renovation of existing multifamily real estate, and the conversion of existing buildings to multifamily units. Thus, it’s an opportune time for investors and private equity groups to act. Not only could an investment in multifamily real estate help solve the housing shortage, but the asset class remains a relatively stable investment with the potential for above-average cash yields and overall returns.
Multifamily construction is booming. Though these projects face some of the same constraints as single-family construction, builders are more likely to take on multifamily projects as the margins are higher. Per U.S. Census Bureau data, the number of permits issued for buildings with 5 or more units in December was up 20 percent from November, and up 42% from December 2020. In addition, the Census reported in December that multifamily housing starts have increased by 56% since December 2020.
Secondly, value-add renovations to existing multifamily assets can play a valuable role in slowing the growing shortage of affordable housing. This is a strategy that our firm, Lucern Capital Partners, specializes in. Per the Census, more than two-thirds of multifamily buildings are more than 30 years old, and many of these need repairs, upgrades, and improved management. A value-add program has a shorter timeline than new construction and keeps units available for rent as renovations are ongoing. This brings benefits to both residents and investors.
Finally, investment firms are getting creative. Such assets as retail, office, restaurant and hotel buildings can be converted to multifamily housing. According to Yardi Matrix, 2021 was the busiest year for conversions in the last 10 years. Developers added 20,100 new apartments in buildings converted from other types of assets such as hotels, student housing, warehouses, among others. With in-depth knowledge of the local market and strong underwriting, such conversion projects can provide the housing communities need, and strong returns to investors.
In summary, to avoid a worsening housing shortage, new single and multifamily residences are needed. Value-add multifamily investors can capitalize on this opportunity and contribute to reducing the negative impact of the housing shortage while generating substantial returns. Said differently, it’s an opportunity to do good while creating wealth.
About Lucern Capital Partners
Lucern Capital Partners is a real estate investment firm that targets value-add multifamily and mixed-use assets along the U.S. East Coast with a focus on the Carolinas. With over 55-years of combined real estate experience, the Lucern Capital Partners team has successfully transacted on over $2.5 billion of debt and equity real estate transactions during their careers. They bring that knowledge to accredited investors to provide income-generating investments in institutional-quality multifamily and mixed-use assets through fund vehicles and standalone transactions.